JetBlue Makes a First-Class Splash

The air routes from New York's JFK Airport to San Francisco International Airport and Los Angeles International Airport have always attracted a high proportion of premium passengers. Business travelers in particular are willing to pay high fares to receive attentive service and comfortable seating on these long flights: particularly late night "red-eyes".

JetBlue (NASDAQ: JBLU) has historically prided itself on offering superior service. Moreover, the carrier has its main base at JFK Airport. Thus, it's not surprising that it has competed on both routes for many years. (In fact, JetBlue flies from JFK to all three Bay Area airports and three of the major LA area airports).

However, JetBlue has never competed intensely for business travelers on these popular routes, because of its one-class cabin. JetBlue's amenities like extra legroom and free TV are nice, but business travelers also want wider seats and more recline (preferably flat beds).

Now, JetBlue is finally making a bid to win business away from larger rivals like AMR (UNKNOWN: AAMRQ.DL) , Delta (NYSE: DAL) , and United Continental (NYSE: UAL) on these long-haul routes. In 2014, JetBlue will introduce a premium cabin on the JFK-San Francisco and JFK-Los Angeles routes. This will give JetBlue a big opportunity to gain corporate market share and get a foothold in the "premium" air travel market. If the company succeeds, it could provide a nice lift to revenue and margins over the next two to three years.

A strong value propositionLast week, JetBlue formally announced that it would offer its first lie-flat seats on the JFK-San Francisco and JFK-Los Angeles routes. JetBlue will operate a dedicated fleet of 11 Airbus A321 aircraft on these routes -- presumably enough to operate at least 11 daily round-trips across the two routes.

These aircraft will be equipped with two different levels of premium seating. First, JetBlue will offer 12 standard lie-flat seats in a two-by-two configuration: similar to other carriers' business class products. Second, JetBlue will offer four private suites in a one-by-one configuration, becoming the only carrier to offer that type of product on a domestic route.

A rendering of JetBlue's premium cabin (courtesy of JetBlue)

JetBlue is also looking to differentiate its offering by providing true high-speed Internet. The company claims that its new Ka-band satellite offers 100 times more bandwidth than previous-generation Ku-band satellites. This allows significantly faster download speeds, especially when more than a handful of passengers are using the Internet. If this technology lives up to expectations, it could be a big draw for business travelers who need to get work done during their flights.

JetBlue will thus offer a product that is competitive with or superior to the service provided by current market leaders American, Delta, and United. Nevertheless, the company is looking to underprice its competitors in a bid for market share. In light of JetBlue's low cost structure and the high business class fares prevailing in the market, it expects to earn very healthy margins with lower premium-class prices.

A big opportunityThe premium transcontinental market represents a key opportunity for JetBlue. Over the past five years or so, the legacy carriers have narrowed JetBlue's cost advantage through the bankruptcy process. As a result, JetBlue's profit margins have shrunk dramatically, leaving the company's stock stuck in neutral.

In light of JetBlue's razor-thin margins, gaining a foothold in the high-margin premium travel segment would be a big win. Moreover, success may also create a growth opportunity. JetBlue could either expand its service to San Francisco and Los Angeles with additional frequencies, or introduce premium service on additional routes.

JetBlue is a fallen angel in the airline sector today. However, the company's innovative nature and differentiated product give it potential competitive advantages that are likely to pay off in the long run. With the company currently trading at a discount to book value, JetBlue represents an attractive contrarian investment opportunity.

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